Head2Head: Lost in TranslationBruce Meuli, Global Transaction Services Advisory executive, and Jonathon Traer-Clark, Head of Strategy, Global Transaction Services, Bank of America Merrill LynchThis month’s Head to Head provides a comparison of bank and corporate treasuries and concludes that, as regulatory compliance drives behaviours and priorities, better understanding of the needs and constraints of each other should help to inform bank-corporate dialogue.

Head2Head: Lost in Translation

JTC Bruce – although we may not always agree, we do share some common ground including a birthday. More relevant though, is that we have both worked in a corporate and a bank across a range of treasury and finance roles. In my current role at Bank of America Merrill Lynch, I often mentally step across into my former corporate treasurer role, as I find the ability to compare and contrast experiences and priorities from both sides invaluable.

BM I agree – the roles share many common issues but the priorities and challenges also differ substantially at times. Let’s take an initial common point: the challenges associated with disparate systems, poor data quality and analytical ability. Although the problems are similar, the motivation and drivers are not. Specifically, the bank treasurer has to invest in systems and reporting capabilities that comply with regulations such as the Basel Committee on Banking Supervision (Basel III) requirements. Therefore, real-time reporting capabilities and the data and information systems required to support compliance are the priority. Conversely, corporate information technology investments are often driven by a desire to improve operational capability in pursuit of risk and operational excellence.

JTC True, but equally, you could argue that regulation drives a corporate’s desire to improve. Remember too that they face their own direct regulatory requirements. Let’s look at the primary functions or role of a bank vs a corporate treasurer. Funding, balance sheet management, FX, interest rate and liquidity management, capital allocation and cash management are all common functional objectives but there are significant differences in the actual processes. Take funding: a key investment area for bank treasurers has been the development of funds transfer pricing models to incorporate the full cost of liquidity, risk, term and balance sheet commitments. This differs significantly, in both complexity and magnitude, from a corporate funding model.

BM Yes, but in certain respects – in the area of equity and market debt as opposed to capital allocation – there are similarities. If you include the corporates with an in-house banking structure and/or an internal finance entity, then parts of the corporate treasurer’s role begin to resemble that of a bank. Add to that intercompany funding requirements and transparent transfer pricing mechanisms, and more similarities with bank treasury processes emerge.

JTC On that, there is one major difference between bank and corporate treasury – the former can only ever be a profit centre. With the latter however, most corporate treasuries are cost or value centres, with few set up as a profit centre. This can lead to fundamental differences in approach. Looking at the current extended period of low interest rates for example, banks are still challenged to meet risk/return targets, whereas corporate treasurers mostly benefit, especially in their ability to access low-cost funding.

BM Sure, but if you are holding significant cash balances the low return on this cash can partially offset the funding benefit. This argument is exacerbated with negative interest rates on some key currencies to the point where these balances are incurring costs. There is also the longer-term issue that some corporates may adjust their business model to a low interest environment and then face challenges when they need to readjust as rates rise. Another common point that I find is not widely understood by the corporate treasurer is that as banks also provide services to other banks, a bank treasury effectively becomes a buyer of bank services in the same way as a corporate treasurer. Even so, the bank-bank relationship is complex and differs to that of a bank-corporate one, as it is normally a reciprocal relationship based on capabilities.

JTC But if a bank is providing services to another bank, this pre-supposes that there is usually a corporate client that will use these services in some way. This potentially complicates the delivery of these services as the supplying bank is not in direct contact with the end consumer – the corporate. These complexities become even greater when you consider issues such as systemic risk or contagion, especially for global multinationals. Not only do these corporations have a large number of banks, bearing in mind the breadth of their activities and footprint, to which they are looking to allocate an appropriate share of wallet, they also have indirect relationships to consider that impact on credit risk. Many corporates are continually challenged to simplify and streamline their banking infrastructure, but this is often very difficult to achieve in practice, whether for regulatory, coverage or technology reasons.